Not Florence Nightingale: The Governance Challenge of Life Threatening Storms

September 12, 2018

Good Morning! In this morning’s eBlog, as Hurricane Florence bears down on the East Coast, the President, yesterday, patted himself on the back for what he deemed an “incredibly successful” job he had done in leading the federal government’s response to the human, fiscal, and physical devastation wrought by Hurricane Maria in Puerto Rico, boasting: “I think Puerto Rico was “an incredible, unsung success,” referring to the devastating hurricane which caused the death of nearly 3,000 Americans.

Hurricane Relief? President Trump patted himself on the back yesterday for an “incredibly successful” job done in Puerto Rico, where the President, in the wake of the storm, had travelled to Ponce and thrown paper towels, deeming federal response efforts as one of his administration’s “best jobs.” Asked what lessons his administration might have learned as it prepares for this week’s Hurricane Florence, headed towards the nation’s capital later this week, the President responded: “I think probably the hardest one we had by far was Puerto Rico, because of the island nature, and I actually think it was one of the best jobs that’s ever been done with respect to what this is all about…The job that FEMA, and law enforcement and everybody did working along with the governor in Puerto Rico, I think was tremendous: I think that Puerto Rico was an incredible, unsung success.” He added that his administration had received “A pluses” for its work in Texas and Florida following hurricanes last year. Yet, even as the official death toll in Puerto Rico has reached nearly 3,000—far in excess of FEMA’s original report of 64—and with electricity still not totally restored, San Juan Mayor Carmen Yulín Cruz yesterday stated: “If he thinks the death of 3,000 people is a success, God help us all.”

Speaking at the White House yesterday, the President sought to assure the public that the FEMA was ready for Hurricane Florence, noting: “We are as ready as anybody has ever been,” as he boasted that the federal government had earned excellent grades for its disaster response in Texas and Florida, but he complained that the even better job done in Puerto Rico had been ignored, describing his administration’s “incredible, unsung success,” by noting the Pentagon had deployed a “tremendous military hospital in the form of a ship” to the island, omitting mention of his failure to suspend the Jones Act and that the ship to which he referred was largely underused: prepared to support 250 hospital beds, it admitted an average of only six patients per day, or 290 in total, over its 53-day deployment. Yet the President described the White House response effort as “one of the best jobs that’s ever been done with respect to what this is all about,” adding, falsely, that Puerto Rico’s electric grid and generating plant “was dead” before Hurricanes Irma and then Maria struck within weeks of one another—or, as the President asserted: “[W]hen the storm hit, they had no electricity, essentially, before the storm.”

As readers are all too aware, electricity was not restored to every customer in Puerto Rico until a few weeks ago. Worse, according to the director of the Puerto Rico Electric Power Authority, approximately a quarter of the federally financed $3 billion in repairs will likely have to be redone. San Juan Mayor Yulín Cruz was more direct, posting on Twitter, yesterday: “If he thinks the death of 3,000 people is a success, God help us all.”

Jose Andrés, a Spanish chef who organized an emergency feeding program on Puerto Rico in the wake of one of the U.S.’s most devastating storms, deemed the President’s comments “astonishing: The death toll issue has been one of the biggest cover-ups in American history…Everybody needs to understand that the death toll was a massive failure by federal government and the White House. Not recognizing how many people died in the aftermath meant the resources and full power of the government was taken away from the American people of Puerto Rico.”

Chef Andrés stressed that the failures spread to food and water distribution—a failure belatedly acknowledged by FEMA in a report released in July, acknowledging the agency was unprepared, with empty warehouses and few qualified staff to attend to the disaster, that it had brought the wrong type of satellite phones to Puerto Rico, and did not have truck drivers to deliver aid from the port, adding that the federal disaster relief agency had been without “situational awareness” of what was happening outside. FEMA’s Michael Byrne, the coordinator for the agency’s Puerto Rico response, has ironically confessed that, unlike the White House, “I think one of the most courageous things FEMA has done is to be honest and frank in the after action and say, ‘We need to work on these areas…And we’re going to. We’re going to get better,” adding that among the areas which needed to be improved was the process to inspect damaged homes: many of the 300,000 homes damaged in the storm are still covered by canvas. To which, Amarilis González, a former English teacher who founded Toldos Pa’ Mi Gente, or Tarps for My People, a group that collected house coverings: “Anyone who flies in to Puerto Rico may notice the amount of blue tarps as they are landing, and that is only a small representation of the rest of the municipalities…If that is a ‘success,’ I do not understand the concept.”

The White House reference this week to Puerto Rico as a “colony” made it clear, however, as Gov. Ricardo Rosselló put it: “The historical relationship between Puerto Rico and Washington is unfair and un-American…It is certainly not a successful relationship,” as the Governor called on the President to extend federal coverage to continuing work on housing restoration and clean-up which is still ongoing, noting the hurricane had constituted the “worst natural disaster in our modern history: Our basic

States Roles in the Wake of Fiscal and Physical Storms

March 13, 2018

Good Morning! In this morning’s eBlog, we consider the federalism challenges within Puerto Rico, where aid to local governments or muncipios for hurricane recovery appears nearly as derelict as federal aid to the U.S. Territory of Puerto Rico, before trying to untangle the perplexing fiscal challenges of public education in Detroit.

Unpromising? Puerto Rico Governor Ricardo Rosselló yesterday noted that from the “beginning, we (the government of Puerto Rico) have established that this is a time where you have to see the effectiveness of each penny invested. And we are all subject to that crucible,” with his comments coming in reaction a request from 11 conservative organizations demanding, in a letter to Congress, the dismissal of Natalie Jaresko, the Director of the PROMESA Oversight Board. No doubt, part of the concern relates to the exceptional disparity in pay: His claim is based on Ms. Jaresko’s salary of $625,000 per year compared to the median income in Puerto Rico of $19,429, or approximately 60% less than on the mainland. The organizations have also requested that “the basic precepts established in PROMESA‒‒precision, transparency, and the creation of a credible plan for the return of the people of Puerto Rico to the capital markets,” urging Congress to schedule a hearing to determine whether the Board is in compliance with the intent of the PROMESA provisions. The epistle was signed by the 60 Plus Retirement Association, the Taxpayers Protection Alliance, the Frontiers of Freedom, the Market Institute, the Americans for Limited Government, the Center for Freedom and Prosperity, the Independent Women’s Voice, the Consumer Action for a Strong Economy, and the Independent Women’s Forum. There is apprehension that the letter could jeopardize efforts by the New Progressive Party and the Popular Democratic Party to provide an immediate financial injection to Puerto Rico’s municipios to assist in the ongoing fiscal and physical recovery from Hurricane Maria. Senate President Thomas Rivera Schatz, who, last year, was elected to a second term as President of the Senate, thereby becoming the only reelected Senate President during the past 28 years, and the only Senate President ever elected as such to non-consecutive terms, said he would amend the Governor’s proposed legislation to grant immediate and direct financial assistance to the 78 municipal governments, as he was presiding over a public hearing of the Commission on Federal, Political and Economic Relations. The Senate President has identified a $100 million fund to be distributed among all municipios, albeit imposing a cap of $5 million to any recipient, and conditioning the aid, granted as a loan, to be administered by the Financial Advisory Authority and Fiscal Agency of Puerto Rico (Aafaf), the Office of Management and Budget, and the Department of the Treasury to authorize it.

Sen. Schatz asked his colleagues: “Who can deny that all the municipalities had losses? The hurricane devastated the island. Everyone knows that (the damage) exceeds a million dollars. If the governor of Puerto Rico has identified $ 100 million, then we have them. If we have them, I do not think it is appropriate to establish a loan and application mechanism that is a tortuous, long, and uncertain route.” In a public hearing, Rolando Ortiz and Carlos Molina, presidents of the Association and the Federation of Mayors, respectively, insisted that the municipalities should receive an allocation of funds, rather than a loan, arguing the island’s municipios lack the funds to repay the money, with Mayors Lornna Soto of Canovanas, Edwin Garcia of Camuy, and Javier Carrasquillo of Cidra, who reviewed the number of occasions in which they have had to withdraw funds from the municipal coffers to make expenses related to the process of emergency and recovery, even as distributions to the municipios from Puerto Rico’s sales and use tax were reduced.

The La Fortaleza project establishes that the Fiscal Oversight Board will have to approve the disbursement of funds—with the revised proposal coming in the wake of an earlier proposal vetoed by the PROMESA Board, because it was not tied to income and liquidity criteria of the municipios. However, Sen. Schatz argued that in the wake of Hurricane Maria, the Board had authorized the government to redirect $1 billion of the current budget for response and emergency tasks. That is, what is emerging is a consistent issue with regard to governance authority—a difference, moreover, not just between the PROMESA Board and the U.S. territory, but also between the Governor, Puerto Rico House, and Senate—differences potentially jeopardizing the proposed legislation to inject as much as $100 million into the municipal coffers damaged by the Hurricanes Irma and María: Sen. Schatz does not favor the granting of loans to municipalities for up to $5 million to mitigate the effects of hurricanes on their collections, or reductions by patents, taxes or remittances from the Municipal Revenues Collection Center; rather he favors helping municipalities with uniform allocations of $1 million, with his proposal providing that the Department of the Treasury, the Office of Management and Budget, the Fiscal Oversight Board, and the Financial Advisory Authority and Fiscal Agency of Puerto Rico must authorize the loans.

Perhaps unsurprisingly, Puerto Rico House Finance Committee Chair Antonio Soto disagrees: he argues that rather than a formula allocation, each municipio should be required to justify the amount it is requesting, noting: “That justification can be part of the project. It is not to give them $100 million, but to say: ‘I have this situation, the collections have fallen, I continued to provide these services,’” even as he acknowledged that PROMESA Board would have to authorize a project such as the one promoted by Sen. Rivera Schatz. 

Presión. The intergovernmental debate is under pressure as the U.S. territory’s cash position has been determined to be 24% below the pre-Hurricane Maria projection, according to cash flow data from EMMA as of the end of last month, showing increased financial pressure after earlier reports had shown limited deterioration. According to a cash flow summary, Puerto Rico’s primary central government account, the Treasury Single Account, contained $1.56 billion as of three weeks ago; whereas, prior to Hurricane Maria’s devastation, the government had projected that on that date there would be $2.061 billion. Puerto Rico Treasury Secretary Raúl Maldonado Gautier reported that January General Fund revenues were 12.2% below pre-Maria projections, no doubt further complicating the PROMESA Board’s efforts to certify a five-year fiscal plan for Puerto Rico: In the draft submitted last month by the Rosselló administration, the government anticipated sufficient cash flow to finance close to 20% of its debt service; however, according to the Puerto Rico Treasury, General Fund net revenues were down 5.2% in the first seven months of the fiscal year compared with projections, with the largest shortfalls compared to expectations coming from foreign corporation profit taxes ($135.4 million) and sales and use taxes ($80 million): in January, net revenues were 12.2% below projection. According to Treasury Secretary Raúl Maldonado Gautier, income taxes were above expectations, because Hurricane Maria had caused employers to postpone payments for the first few months of the fiscal year.

Let There Be Light! Puerto Rico’s Electric Power Authority (AEE) now projects electricity service will be restored to at least 95% by the end of May, with PREPA interim Director Justo González announcing, moreover, that the public utility will locate solar panels in certain high mountain parts of the island, which, he noted, was “part of what FEMA has in its hands and agrees to do so.”

Schooled on Recovery? On June 8, 2016, Michigan Senate Majority Leader Arlan Meekhof (R-West Olive), in urging his colleagues to vote for a significant bailout of Detroit’s public schools, said the plan would be sufficient to pay off the District’s debt, would provide transition costs for when the district splits into two districts and returns the district to a locally elected school board in January, stating: “This represents a realistic compromise for a path to the future: At the end of the day, our responsibility is to solve the problem…Without legislative action, the Detroit Public Schools would head toward [municipal] bankruptcy, which would cost billions of dollars and cost every student in every district in Michigan.” Yesterday, Jonathan Oosting, writing for the Detroit News, wrote that U.S. Education Secretary Betsy DeVos said Sunday she “does not know if traditional public schools in Michigan have improved since she and others began pushing to open the state up to choice and charter schools. Recent analyses show Michigan students have continually made the least improvement nationally on standardized test scores since 2003, and it is one of only five states where early reading scores have declined over that span.” His article came in the wake of the Secretary’s interview with “60 Minutes,” where she had been pressed on her assertion that traditional public schools in places like Florida improved when students were given more choice to attend different schools, with CBS’s Lesley Stahl asking: “Now, has that happened in Michigan? “We’re in Michigan. This is your home state: “have the public schools in Michigan gotten better?” In response, the Secretary said: “I don’t know. Overall, I, I can’t say overall that they have all gotten better.” Ms. Stahl followed up, telling Secretary DeVos the “whole state is not doing well,” and that “the public schools here are doing worse than they did.” In response, Secretary DeVos said: “Michigan schools need to do better. There is no doubt about it.” Ms. Stahl then asked the Secretary if she has seen the “really bad schools” and attempted to try to figure out what has been happening in them—to which Secretary DeVos responded said she has “not intentionally visited schools that are underperforming.”

The interview resurrected a long-running debate in Michigan, which opened the door to publicly funded charter schools in 1994 and is now a leading state for charter academies; indeed, Detroit today ranks third in the nation for the percentage of students who attend charter schools, according to the National Alliance for Public Charter Schools. (Flint ranks second.) Today, according to a recent Education-Trust Midwest analysis of National Assessment of Education Progress standardized test scores, Michigan students ranked 41st in the country for fourth-grade reading performance in 2015, down from 38th in 2013, and 28th in 2003; in an analysis by University of Michigan Professor Brian A. Jacob, he found that Michigan students were at the bottom of the list when it comes to proficiency growth in the four measures of the exam; according to the NAEP results, in 2015, the average math score of eighth-grade students in Michigan was 278 out of 500, compared with the national average score, 281: the average Michigan score has not significantly changed from 280 in 2013 and 277 in 2000. Professor Jacob’s analysis found that 29% of Michigan students performed at or about the “proficient level” on the NAEP exam in 2015—results not significantly different from the 30% found in 2013, or the 28% recorded in 2000. Secretary DeVos, who had taken the lead in launching the Great Lakes Education Project to lobby for school choice in Michigan, and who has consistently said the government should invest in students, not buildings or institutions, in response to Ms. Stahl’s follow up query: “But what about the kids who are back at the school that’s not working? What about those kids?;” said: “[S]tudies show that when there is a large number of students that opt to go to a different school or different schools, the traditional public schools actually, the results get better, as well.”

Last week, the Detroit Public Schools Community District announced the launch of the 5000 Role Models of Excellence Project for minority males in grades 6 through 12: a project designed to develop a leadership pipeline for young men utilizing school-based and community mentors and role models through various methods of support, including themed weekly meetings, a monthly speaker series, community service projects, and college access support. The Detroit Board of Education members voted 7-0 to launch the 5000 Role Models Project in an effort to “create and develop a pipeline of leadership from within the walls of the District’s schools, describing thus as a proven mentoring program that prepares young men for success, generated by role models in our schools who are supported by male mentors in the community.”

Motoring Back from Chapter 9 Bankruptcy

March 9, 2018

Good Morning! In this morning’s eBlog, we consider the state of the City of Detroit, the state of the post-state takeover Atlantic City, and the hard to explain delay by the U.S. Treasury of a loan to the U.S. Territory of Puerto Rico.

An Extraordinary Chapter 9 Exit. Detroit Mayor Mike Duggan yesterday described the Motor City as one becoming a “world-class place to put down your roots” and make an impact: “We’re at a time where I think the trajectory is going the right way…We all know what the issues are. We’re no longer talking about streetlights out, getting grass cut in the parks. We’re making progress. We’re not talking all that much about balancing the budget.” His remarks, coming nearly five years after I met with Kevin Orr on the day he had arrived in Detroit at the request of the Governor Rick Snyder to serve as the Emergency Manager and steer the city into and out of chapter 9 municipal bankruptcy, denote how well his plan of debt adjustment as approved by U.S. Bankruptcy Judge Steven Rhodes has worked.

Thus, yesterday, the Mayor touted the Detroit Promise, a city scholarship program which covers college tuition fees for graduates of the city’s school district, as well as boosting a bus “loop” connecting local charter schools, city schools and after-school programs. Maybe of greater import, the Mayor reported that his administration intends to have every vacant, abandoned house demolished, boarded up, or remodeled by next year—adding that last year foreclosures had declined to their lowest level since 2008. Over the last six months, the city has boarded up 5,000 houses, sold 3,000 vacant houses for rehab, razed nearly 14,000 abandoned houses, and sold an estimated 9,000 side lots. The overall architecture of the Motor City’s housing future envisions the preservation of 10,000 affordable housing units and creation of 2,000 new ones over the next five years.

The Mayor touted the success of the city’s Project Green Light program, noting that some 300 businesses have joined the effort, which has realized, over the last three years a 40% in carjackings, a 30% decline in homicides since 2012, and 37% fewer fires, adding that the city intends to expand the Operation Ceasefire program, which has decreased shootings and other crimes, to other police precincts. On the economic front, the Mayor stated that Lear, Microsoft, Adient, and other major enterprises are moving or planning to open sites: over the last four years, more than 25 companies of 100-500 jobs relocated to Detroit. On the public infrastructure radar screen, Mayor Duggan noted plans for $90 million in road improvements are scheduled this year, including plans to expand the Strategic Neighborhood Fund to target seven more areas across the city, add stores, and renovate properties. Nearly two years after Michigan Senate Majority Leader Arlan Meekhof (R-West Olive) shepherded through the legislature a plan to pay off the Detroit School District’s debt, describing it to his colleagues as a “realistic compromise for a path to the future…At the end of the day, our responsibility is to solve the problem: Without legislative action, the Detroit Public Schools would head toward bankruptcy, which would cost billions of dollars and cost every student in every district in Michigan,” the Mayor yesterday noted that a bigger city focus on public schools is the next front in Detroit’s post-bankruptcy turnaround as part of the city’s path to exiting state oversight. He also unveiled a plan to partner with the Detroit Public Schools Community District, describing the recovery of the district as vital to encourage young families to move back into the city, proposing the formation of an education commission on which he would serve, as well as other stakeholders to take on coordinating some city-wide educational initiatives, such as putting out a universal report card on school quality (which he noted would require state support) and coordinating bus routes and extracurricular programs to serve the city’s kids regardless of what schools they attend.

The Mayor, who at the end of last month unveiled a $2 billion balanced budget, noted that once the Council acts upon it, the city would have the opportunity to exit active state oversight: “I expect in April or May, we’re going to see the financial review commission vote to end oversight and return self-determination to the City of Detroit,” adding: “As everybody here knows, the financial review commission doesn’t entirely go away: they go into a dormancy period. If we in the future run a deficit, they come back.”

His proposed budget relies on the use of $100 million of an unassigned fund balance to help increase spending on capital projects, including increased focus on blight remediation, stating he hopes to double the rate of commercial demolition and get rid of every vacant, “unsalvageable” commercial property on major streets by the end of next year—a key goal from the plan he unveiled last October to devote $125 million of bond funds towards the revitalization of Detroit neighborhood commercial corridors, part of the city’s planned $317 million improvements to some 300 miles of roads and thousands of damaged sidewalks—adding that these investments have been made possible from the city’s $ billion general fund thanks to increasing income tax revenues—revenues projected to rise 2.7% for the coming fiscal year and add another $6million to $7 million to the city’s coffers. Indeed, CFO John Hill reported that the budget maintains more than a 5% reserve, and that the city continues to put aside fiscal resources to address the  higher-than-expected pension payments commencing in 2024, the fiscal year in which Detroit officials project they will face annual payments of at least $143 million under the city’s plan of debt adjustment, adding that the retiree protection fund has performed well: “What we believe is that we will not have to make major changes to the fund in order for us to have the money that we need in 2024 to begin payments; In 2016 those returns weren’t so good and have since improved in 2017 and 2018, when they will be higher than the 6.75% return that we expected.” He noted that Detroit is also looking at ways to restructure its debt, because, with its limited tax general obligation bonds scheduled to mature in the next decade, Detroit could be in a position to return to the municipal market and finance its capital projects. Finally, on the public safety front, the Mayor’s budget proposes to provide the Detroit Police Department an $8 million boost, allowing the police department to make an additional 141 new hires.

Taking Bets on Atlantic City. The Atlantic City Council Wednesday approved its FY2019 budget, increasing the tax levy by just under 3%, creating sort of a seesaw pattern to the levy, which three years ago had reached an all-time high of $18.00 per one thousand dollars of valuation, before dropping in each of the last two years. Now Atlantic City’s FY2019 budget proposal shows an increase of $439,754 or 3.06%, with Administrator Lund outlining some of the highlights at this week’s Council session. He reported that over the years, the city’s landfill has been user fee-based ($1 per occupant per month) to be self-sufficient; however, some unforeseen expenses had been incurred which imposed a strain on the landfill’s $900,000 budget. Based on a county population of 14,000, the money generated from the assessment amounts to roughly $168,000 per year, allowing the Cass County Landfill to remain open. However, the financing leaves up to each individual city the decision of fee assessments. Thus, he told the Council: “The Per Capita payment to the landfill accounted for about .35 to .40 cents of the increase.”  Meanwhile, two General Department heads requested budget increases this year and five Department Heads including; the Police Department and Library submitted budgets smaller than the previous year. Noting that he “never advocate(s) for a tax increase,” Mr. Lund stated: “But it is what it is. It was supposed to go up to $16.98 last year and now we are at $16.86, so it’s still less,” adding that the city’s continuous debt remains an anchor to Atlantic City’s credit rating—but that his proposed budget includes a complete debt assumption and plan to deleverage the City over the next ten years.

Unshelter from the Storm. New York Federal Reserve Bank President, the very insightful William Dudley, warns that Puerto Rico should not misinterpret the economic boost from reconstruction following hurricanes that hit it hard last year as a sign of underlying strength: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster,” as he met with Puerto Rican leaders in San Juan: “We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” warning, however, he expects economic growth to slow again in 2019 or 2020: “It’s “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”

President Dudley and his team toured densely populated, lower-income, hard hit  San Juan neighborhoods, noting the prevalence of “blue roofs”—temporary roofs overlaid with blue tarps which had been used as temporary cover for the more permanent structures devastated by the hurricanes, leading him to recognize that lots of “construction needs to take place before the next storm season,” a season which starts in just two more months—and a season certain to be complicated by ongoing, persistent, and discriminatory delays in federal aid—delays which U.S. Treasury Secretary Steven Mnuchin blamed on Puerto Rico, stating: “We are not holding this up…We have documents in front of them that [spell out the terms under which] we are prepared to lend,” adding that the Trump Administration has yet to determine whether any of the Treasury loans would ultimately be forgiven in testimony in Washington, D.C. before the House Appropriations Subcommittee on Financial Services and General Government.

Here, the loan in question, a $4.7 billion Community Disaster Loan Congress and the President approved last November to benefit the U.S. territory’s government, public corporations, and municipalities—but where the principal still has not been made available, appears to stem from disagreements with regard to how Puerto Rico would use these funds—questions which the Treasury had not raised with the City of Houston or the State of Florida.  It appears that some of the Treasury’s apprehensions, ironically, relate to Gov. Ricardo Rosselló’s proposed tax cuts in his State of the Commonwealth Speech, in which the Governor announced tax cuts to stimulate growth, pay increases for the police and public school teachers, and where he added his administration would reduce the size of government through consolidation and attrition, with no layoffs, e.g. a stimulus policy not unlike the massive federal tax cuts enacted by President Trump and the U.S. Congress. It seems, for the Treasury, that what is good for the goose is not for the gander.

At the end of last month, Gov. Rosselló sent a letter to Congress concerned that the Treasury was now offering only $2.065 billion, writing that the proposal “imposed restrictions seemingly designed to make it extremely difficult for Puerto Rico to access these funds when it needs federal assistance the most.” This week, Secretary Mnuchin stated: “We are monitoring their cash flows to make sure that they have the necessary funds.” Puerto Rico reports it is asking for changes to the Treasury loan documents; however, Sec. Mnuchin, addressing the possibility of potential loans, noted: “We’re not making any decision today whether they will be forgiven or…won’t be forgiven.” Eric LeCompte, executive director of Jubilee USA, a non-profit devoted to the forgiveness of debt on humanitarian grounds, believes the priority should be to provide assistance for rebuilding as rapidly as possible, noting: “Almost six months after Hurricane Maria, we are still dealing with real human and economic suffering…It seems everyone is trying to work together to get the first installment of financing sent and it needs to be urgently sent.”

Part of the problem—and certainly part of the hope—is that President Dudley might be able to lend his acumen and experience to help. While the Treasury appears to be most concerned about greater Puerto Rico public budget transparency, Mr. Dudley, on the ground there, is more concerned that Puerto Rican leaders not misinterpret the economic boost from reconstruction following the devastating hurricanes as a sign of underlying strength, noting: “It’s really important not to be seduced by that strong recovery in the immediate aftermath of the disaster: We would expect there to be a bounce in 2018 as the construction activity gets underway in earnest,” before the economic growth slows again in 2019 or 2020, adding, ergo, that it was “important not to misinterpret what it means, because a lot still needs to be done on the fiscal side and the long-term economic development side.”

Fiscal Sand Traps & Disparate, Inequitable Responses

March 7, 2018

Good Morning! In this morning’s eBlog, we consider the fiscal sand trap into which the small Virginia municipality of Buena Vista has fallen, before examining the ongoing, disparate physical and fiscal recovery issues in Puerto Rico.

Is the Municipal Fiscal Vista Good? Virginia is somewhat unique in that it does not specifically authorize municipalities to file for chapter 9 municipal bankruptcy; it does, in certain situations, allow for a receiver allow for the appointment of a receiver with respect to revenue bonds (§15.2-4910). Now, the aptly named Buena Vista, Virginia, a small, independent city located in the Blue Ridge Mountains with a population of about 6,650, where, as we have previously written, the issue of non-payments of municipal bond interest on debt issued for its public golf course became an election issue, has, in effect, cone back as a mulligan. This time, the issue involves, again, the municipal golf course, and the issue has re-arisen because of the municipality’s decision not to make the bond payments on a municipally-owned golf course that the new majority on Council oppose as inconsistent with an essential government activity—rejecting a moral obligation pledge on what has become a failed economic development project, as the city’s elected leaders have opted instead to focus—in the wake of the Great Recession—on essential public services, putting the city in a subpar fiscal situation with Vista Links, which was securing the bonds, according to Virginia state records. The company, unsurprisingly, has sued to get the bond payments it had been promised—potentially putting at risk the city’s city hall and other municipal properties which had been put up as collateral. Buena Vista City Attorney Brian Kearney discerns this to be an issue of a moral obligation bond, rather than a general obligation municipal bond, so that “[W]e could not continue to do this and continue to do our core functions.” In the wake of the fiscal imbroglio, the Virginia Commission on Local Government (COLG)—which provides an annual fiscal stress study‒ended up playing a key role in the Petersburg effort in the General Assembly—finding that very poor management had led to an $18 million hole.

Nevertheless, the municipality’s selective payment default on its $9.2 million in lease revenue bonds has driven Municipal Markets Associates to describe the city’s decisions as “perhaps a worst-in-class example of erosion in issuer willingness to pay bondholders. Buena Vista’s default can no longer be blamed on weak local budget or economic conditions; rather, the city is currently choosing neither to pay nor negotiate with bondholders, because the pledged appropriation security permits this to occur. Further, while the commonwealth has applied some pressure to the city by denying it access to state loan funds via the VRA program, Virginia has chosen not to more proactively interfere in city affairs and has made multiple grants to Buena Vista in recent years.” Nevertheless, Buena Vista won the first round in court regarding the bond default, after the court concurred that the city had a moral obligation, but not a full faith and credit obligation. (It is unclear whether there will be an appeal.) While the Commonwealth of Virginia has applied some pressure to the city by denying it access to state loan funds via the VRA program, Virginia has chosen not to more proactively interfere in city affairs and has made multiple grants to Buena Vista in recent years. Two years ago, Buena Vista had made payments toward all other out-standing debt obligations, including $5.5 million in general fund bonds and loans and $7.9 million in revenue bonds; the municipality added $500,000 to its net General Fund net revenues—leaving it in a fiscal sand trap caught between $94 million in obligations towards debt service on its ACA-insured bonds while continuing to growth fund balance.

Here, the municipality’s default triggered negotiations with bond insurer, ACA Financial Guaranty Corp., which led to a forbearance agreement—one on which the city subsequently defaulted—triggering the Commonwealth of Virginia to bar financing backup to the city from the state’s low-cost municipal borrowing pool, lest such borrowing would adversely impact the pool’s credit rating—and thereby drive up capital borrowing costs for cities and counties all across the state. In this instance, the Virginia Resources Authority refused to allow Buena Vista to participate in the Virginia Pooled Financing Program to refinance $9.25 million of water and sewer obligations to lower debt service costs—lest inclusion of such a borrower from the state’s municipal pool would negatively impact the pool’s offering documents—where some pooled infrastructure bonds, backed by the Commonwealth’s moral obligation pledge, are rated double-A by S&P Global Ratings and Moody’s Investors Service.

Seven years ago, the municipality had entered into a five-year forbearance agreement with bond insurer ACA Financial Guaranty Corp.—an agreement which permitted Buena Vista to make 50% of its annual municipal bond payments for five years—an agreement on which Buena Vista defaulted when, two years ago, the City Council voted against inclusion of its FY 2015 budgeted commitment to resume full bond payments. That errant shot triggered UMB Bank NA to file a lawsuit in state court in 2016 in an effort to enforce Buena Vista’s fiscal obligation. In response, the municipality contended the golf course deal was void, because only four of the city’s seven council members had voted on the bond resolution and related agreements—which included selling the city’s interest in its “public places,” arguing that Virginia’s constitution mandates that all seven council members be present to vote on the golf course deal, because the agreement granted a deed of trust lien on city hall, police, and court facilities which were to serve as collateral for the bonds.

The golf course in question, which opened in 2004, never generated sufficient revenue to keep up with loan payments, leading the municipality to default on its $9.2 million bond, which, in turn, led Buena Vista’s municipal bonds insurer, ACA Financial Guaranty Corp., to file suit against the municipality, seeking to have Buena Vista ordered to resume payments—a suit which a federal court last month dismissed, concluding the city was only under a moral obligation, not a legal one, to pay back the loans. Unsurprisingly, ACA has pulled out another club and now ACA plans to appeal the judge’s decision, thereby creating uncertainty with regard to the city’s fiscal solvency—creating uncertainty for the business community. Now, however, it seems that with greater confidence in their judicial outcome, and a key business investment in a number of downtown properties, it appears of developers are starting to pick up on the momentum. Buena Vista Mayor William “Billy” Fitzgerald believes these new potential developments fit perfectly with his goals as the municipality’s newly elected leader: he wants to bring five to seven new businesses and one manufacturer to the area this year. In addition, he said he wants to cut some of the red tape and fees associated with opening businesses, adding that there has been more movement recently than the city’s had in a long time, adding: “In two years, I think Buena Vista will be a different place.”

A year ago, the city filed a motion to dismiss the federal suit for failure to state a claim—a claim on which U.S. District Judge Norman K. Moon held a hearing last Friday—with the municipality arguing that the golf course’s lease-revenue debt is not a general obligation. Therefore, the city appears to be driving at a legal claim it has the right to stop payment on its obligation, asserting: “The city seeks to enforce the express terms of the bonds, under which the city’s obligation to pay rent is subject to annual appropriations by the City Council, and ceases upon a failure of appropriations.” Moreover, pulling another fiscal club from its bag, the city claimed the municipal bonds here are not a debt of the city; rather, the city has told the court that the deed of trust lien for the collateral backing the bonds is void. That is an assertion which ACA, in its motion to dismiss, deemed an improper attempt to litigate the merits of the suit at the pleading stage, noting: “Worse, the city wants this court to rule that the city only has a ‘moral obligation’ to pay its debts, and that [ACA’s] only remedy upon default is to foreclose on a fraction of the collateral pledged by the city and the Public Recreational Facilities Authority of the city of Buena Vista….If adopted, this court will be sending a message to the market that no lender should ever finance public projects in Virginia because municipalities: (a) have unbridled discretion to not repay loans; and (b) can limit the collateral that can be foreclosed upon.” In a statement subsequently, ACA added: “It’s unfortunate that Buena Vista’s elected officials have forced ACA into court after recklessly choosing to have the city default on $9.2 million in debt even though the city has ample funds to make the payments that are owed…This is particularly troubling, because ACA spent years negotiating in good faith after the city claimed financial hardship, and even provided a generous forbearance agreement that reduced payments by 50% starting in 2011. After the city defaulted on that deal in 2014, it offered ACA only pennies on the dollar, while seeking to be absolved of all future burdens of this financing. Left with no reasonable alternative, we must look to the court for an equitable and fair outcome.”

Fiscal Darkness & Despair. More than five months after Hurricane Maria plowed through Puerto Rico, some parts of the island remain in the dark; it remains a long, long way from getting back for businesses: the U.S. territory’s patchwork power grid remains fragile, and hundreds of thousands of Puerto Ricans remain without power. While many have been living in hotels with their expenses covered by FEMA, those reimbursements are nearing expiration—not just in Puerto Rico, but also on the mainland. Today, there are nearly 10,000 Puerto Ricans scattered throughout 37 states and Puerto Rico who have been living in hotels paid by FEMA—aid now on the brink of ending a week from Tuesday. Many of them are poor families, who on the island survived with low wages. Many do not have savings or relatives who can help them or own their homes on the island. Others confront health problems and distrust the medical system on the island or have children with disabilities who need continuous care. Government relief workers have installed 57,000 blue tarps as makeshift roofs on damaged homes across the island. There is no plan for installing permanent roofs. Major intersections in San Juan still lack working traffic lights. More than 10,000 small businesses — nearly 20 percent of the island is total — remain closed. At the upscale Mall of San Juan, two anchor stores — Saks Fifth Avenue and Nordstrom — are shut because of storm damage, although Nordstrom may reopen in a few months. Some hotel workers, cabdrivers and bartenders in San Juan have been living without power since September.

The most optimistic estimate is that Puerto Rico faces a two-year economic recovery. That assumes it can rebuild its power grid, restructure its finances in a court-supervised process and not be struck by another devastating storm. For its part, FEMA reports it has delivered more than $113 million in rental assistance to more than 129,000 Puerto Ricans affected by Maria. Governor Ricardo Roselló has said he has formally requested the federal government to allow families in hotels to stay there until May 14th. That recovery, moreover, is made more difficult by the fiscal circumstances before the storm even struck—when some 45% of the territory’s 3.4 million Americans lived in poverty and more than 16,000 homeowners were facing foreclosure. The size of the human devastation remains stark: more than one million Puerto Ricans applied to FEMA for emergency assistance: less than half have been served. The situation is, as Javier E. Zapata-Rodríguez, the Deputy Director of Economic Development for PathStone Enterprise Center, put it: “This is like the perfect storm of an economic disaster…There is not enough capital flowing, and a lot of small businesses are closing up shop, because they were ailing before the hurricane.” Adding to the dismal situation, even those claims that are being paid have been slow—and 60% have, so far, been denied. Meanwhile, tourism, which accounts for about 6 percent of Puerto Rico’s economy and supports more than 60,000 jobs, is all but gone for this season: nearly a dozen big resorts in and around San Juan are closed, while, many of those which are open and operating are filled not with tourists, but rather with relief workers and government contractors who are permitted discounted rates.

As we have noted, the economy is also suffering from emigration: it is not just the 200,000 residents who have departed to live on the mainland, but also how that has altered the demographics of those who remain—generally older and poorer. As the New York Federal Reserve reported last year, four months before Maria, 36% of Puerto Rico’s small businesses planned to hire more workers and 50% planned to invest in new equipment and technologies—all plans devastated by the storm.

Today, in the wake of such an inadequate federal response, the power situation in the U.S. territory remains dispiriting: at the end of last week, many in San Juan and along the island’s northern coast lost power in the middle of the workday. Indeed, generators are no longer an option for a business: they are a necessity—as they are for homes and hospitals with patients reliant upon vital medical devices. For potential overseas investors, new investments appear to be on hold pending some certainty on Puerto Rico’s electric grid restoration and reliability—and how FHA will act on the current moratorium on home foreclosures—a decision with implications for assessed property values affecting municipios bottom lines. The recovery too awaits the progress of what has been, so far, a slow trickle in response to filed insurance claims: to date, while 299,999 claims have been filed by homeowners and businesses, only $1.7 billion in payouts have been approved, according to the insurance department: much of the federal assistance is being dispensed as grants and loans for which businesses and individuals apply for from FEMA and the Small Business Administration, even as attorneys and community groups report that FEMA has rejected approximately 60% of the 1.1 million household applications it has received—a figure, it should be noted, which FEMA deems misleading, because some rejected applicants had received loans from the Small Business Administration or aid from other agencies. One key reason for the disproportionate rejection rate appears to be the stark difficulty many Puerto Ricans have encountered in proving that they own a home: only 65% of properties in Puerto Rico are officially registered, making this an especially harsh and acute problem affecting families and local governments in small cities and rural areas where there’s a custom of property owners not recording titles to homes.

Fiscal Recoveries from Fiscal & Physical Storms

eBlog

February 23, 2018

Good Morning! In this morning’s eBlog, we consider the municipal fiscal threats to Puerto Rico and the U.S. Virgin Islands, before taking a fiscal spin on the roulette tables of Atlantic City.

Fiscal Hurricane Fallout. Jaison R. Abel, Jason Bram, Richard Deitz, and Jonathan Hastings of the New York Federal Reserve this week, in their examination of the fallout in the wake of Hurricanes Irma and Maria on the economies of the U.S. territories of Puerto Rico and the U.S. Virgin Islands noted that both were suffering from significant economic downturns and fiscal stress well before the storms hit nearly six months ago—noting that in their wake, the initial job losses in Puerto Rico totaled about 4 percent; in the U.S. Virgin Islands, job losses were double that—and there has been no rebound thus far. The authors wrote that these losses are considerably steeper than what has typically been experienced in the wake of most significant U.S. natural disasters, albeit not nearly as devastating as Hurricane Katrina’s unprecedented impact on the New Orleans economy more than a decade ago. The Fed three noted that domestic air passenger data indicate that from last September through November, more than 150,000 people left Puerto Rico, net of arrivals, and that the number who left the U.S. Virgin Islands was proportionally even larger. Thus, they opined, looking ahead, recovery will be affected by a variety of factors: especially: the level degree of out-migration, the level of external aid these economies receive, and the effectiveness of fiscal and other reforms—especially in Puerto Rico. They noted that Hurricane Maria was the most devastating hurricane to slam Puerto Rico in nearly a century—leaving an enormous toll of lives, homes, and businesses lost or suffering enormous damage, devastation of most crops and other agricultural assets, and severe havoc to its public infrastructure, adding that both for responding to the human and economic misery, the island’s experiencing of the most severe power outage in U.S. history means “it may still take months to fully restore electricity and other critical infrastructure,” describing the devastation to the U.S. Virgin Islands as similar, especially St. Croix, where I taught school long before most readers were born.

Nevertheless, the Fed Gang of Three wrote that recovery is underway in both Puerto Rico and the U.S. Virgin Islands, reporting that, as of last month, satellite images of nighttime lights suggest roughly 75 percent power restoration for Puerto Rico overall, with the southern and western parts of the island seeing nearly full restoration, and San Juan close to that level. In contrast, however, they determined that the eastern end of Puerto Rico and many interior areas have lagged substantially. As of the end of last year, they reported that the labor market has begun to recover in Puerto Rico: employment in leisure and hospitality (largely restaurants), the sector usually most affected by natural disasters, have started to bounce back in Puerto Rico, albeit not yet in the U.S. Virgin Islands. And, as often happens following natural disasters, jobs are being added in both Puerto Rico and the U.S. Virgin Islands in industries involved in clean-up, restoration, and rebuilding efforts—most notably, construction. Thus, they believe Puerto Rico and the U.S. Virgin Islands are confronted with a long and difficult recovery process ahead—a fiscal and physical process made all the more difficult because of poor economic and fiscal conditions prior to the storms.  

Financing a Recovering City’s Emergence from a State Takeover. The Atlantic City Council has voted approval the issuance of debt to pay off millions the municipality owes to pay off deferred pension and health care contributions from 2015—after, in 2015, state officials had urged the delay of some $37.2 million in pension and health care contributions—a delay which, today, officials note has added up to about $47 million with the added interest. In the ordinance the Council voted Wednesday 6-3 to authorize, Atlantic City can now issue as much as $55 million worth of municipal bonds to help finance those accrued debts, with the vote coming in the wake of a lengthy discussion between the Council and 13 residents, each of whom spoke in opposition: some urged the elected leaders to table the matter for further review, while others questioned who had authorized the deferment, whether the city was obligated to pay the interest rate, and whether there were other options to finance the debt—debt which, as of the end of the calendar year, had reached more than $344 million in outstanding debt. Timothy Cunningham, New Jersey’s local government services director and now the state appointed takeover appointee, has explained to residents the option to bond for the deferred payments would prevent it from having to go into the general fund—that is in lieu of the city being forced to raise tax rates: the municipal bond interest payments would instead be financed via the Investment Alternative Tax from casinos, which, under state takeover regulations, are redirected to be used in Atlantic City for debt service, he noted. The City Council had originally slated the issue for a vote last month, but withdrew the scheduled vote in order to host two public hearings on the matter.

At the session, Councilman Jesse Kurtz said he would have preferred a different resolution to making the payments, questioning whether Atlantic City would be obligated to pay back the payments’ interest if the deferment was at the suggestion of the State, noting it did not “sit right” with him to vote for the ordinance without a formal statement from Gov. Phil Murphy’s administration authorizing it: “When we’re short on money, the answer is to borrow money…I don’t like that.” Atlantic City Council President Marty Small responded that after the ordinance was pulled last month, city and state officials asked the Governor’s administration for forgiveness on the payment; however, the response was negative, adding that the city knew the day was coming to pay the deferred payments—and that such payment was the city’s obligation: to act otherwise, he noted, would be “putting the taxpayers in harm’s way” if they did not act to borrow to make the payments: “It’s not us versus you: What affects you, affects us.” Councilmember Kurtz, along with Councilmen Moisse Delgado and Jeffree Fauntleroy II, voted against the measure, while Councilmembers Small, George Tibbitt, Chuen “Jimmy” Cheng, William Marsh, Kaleem Shabazz, and Aaron Randolph voted aye. For his part, Mayor Frank Gilliam, told his colleagues in opposing the matter, the city needs to come up with “better ways to deal with our finances,” regardless of whether council passed the bond ordinance: “We’re still $400 million in debt.”

Restructuring, Refinancing, & Repowering in the Wake of a Quasi Municipal Bankruptcy

January 23, 2017

Good Morning! In today’s Blog, we consider the fiscal challenges to the U.S. Territory of Puerto Rico in restructuring and rebuilding its public infrastructure.

Puerto Rico Governor Ricardo Rosselló yesterday announced he will privatize the state Electric Power Authority (AEE), stating: “ESA will cease to exist as it currently operates, and during the next few days the process will start where ESA assets will be sold to companies that will transform the generation system into a modern, efficient and less expensive one for the people.” The Governor’s announcement came at a time when almost half a million users of the system are still without service some 124 days after Hurricane Maria’s stormy passage. 

The privatization of the PREPA has been a priority objective of the Government and the PROMESA Fiscal Supervision Board—indeed, last August, before hurricanes Irma and Maria struck Puerto Rico, Chairman José Carrión, had assured that the privatization would be carried out as soon as possible. Indeed,the Board would have to approve any privatization—and, it seems likely that U.S. District Court Judge Laura Taylor Swain might well have some oversight as the Governor develops the first phase—drafting legislation, and then defining the public procurement process. The Governor, in what appears to be an effort to “kill two birds with one stone,” has also described the sale as one where proceeds would be used to help meet public pension obligations.

In his announcement, Gov. Rosselló explained that the process will take 18 months and will be carried out in three phases: “In the first one, the legal framework will be defined through legislation, the market will be assessed, and the call will be opened for companies interested in participating.” He said that in the second step, bids be received and evaluated; and in the third, the terms of the awarding and hiring of the selected company will be negotiated. In making his announcement, the Governor assured that Puerto Rico’s electrical system is 28 years older than the average for the industry in the U.S., noting: “PREPA has become a heavy burden for our people, who today are hostage to their poor service and high cost, what we know today as PREPA does not work and cannot continue to operate like this.” 

Unsurprisingly, his pronouncement was criticized by different authorities: Independence Party Senator Juan Dalmau described his announcement as a “manipulation” to justify the lack of energy on the island since the hurricane. Mayor Carmen Maldonado of Morovis, a city of some 27,000 founded in 1817, and the island’s only municipality which was not devastated by the 1853 cholera epidemic—a devastation remembered both by your scribe who had cholera in Colombia, but also an event which led to what, today, has become a common expression: “La isla menos Morovis,” [all the island but Morovis]—a phrase believed by most Puerto Ricans to have a negative connotation against moroveños. Morovis Mayor Carmen Maldonado responded that the Governor’s announcement does not offer solutions for those who still do not have service in their homes and businesses, stating: “People are still waiting for a service restoration plan.” 

For her part, San Juan Mayor Carmen Yulin Cruz, known for her criticisms of the Trump administration’s response to Puerto Rico after Hurricane Maria, spoke out against the proposal, noting: on her official Twitter account, that PREPA’s privatization would put the Commonwealth’s economic development into “private hands,” and that the power authority will begin to “serve other interests,” describing it as a “clear” strategy to “create chaos at a time when citizens are in need in order to sell something as positive that will be negative in the long run.” The malingering situation, however, is, according to the most recent report from the U.S. Department of Energy, that some 36% of PREPA customers are still without power four months after Maria caused widespread devastation on the island.